GOLD EXPORTS AND IMPORTS
Gold exports and imports, while not constituting any great part of the
activity of the average foreign department, are nevertheless a factor
of vital importance in determining the movement of exchange. The loss
of gold, in quantity, by some market may bring about money conditions
resulting in very violent movements of exchange; or, on the other hand,
such movements may be caused by the efforts of the controlling
financial interests in some market to attract gold. The movement of
exchange and the movement of gold are absolutely dependent one on the
other.
Considering broadly this question of the movement of gold, it is to be
borne in mind that by far the greater part of the world's production of
the precious metal takes place in countries ranking very low as to
banking importance. The United States, is indeed, the only first-class
financial power in which any very considerable proportion of the
world's gold is produced. Excepting the ninety million dollars of gold
produced in the United States in 1908, nearly all of the total
production of 430 million dollars for that year was taken out of the
ground in places where there exists but the slightest demand for it for
use in banking or the arts.
That being the case, it follows that there is to be considered, first,
the _primary_ movement of nearly all the gold produced--the movement
from the mines to the great financial centers.
Considering that over half the gold taken out of the ground each year
is mined in British possessions, it is only natural that London should
be the greatest distributive point. Such is the case. Ownership of the
mines which produce most of the world's gold is held in London, and so
it is to the British capital that most of the world's gold comes after
it has been taken out of the ground. By every steamer arriving from
Australia and South Africa great quantities of the metal are carried to
London, there to be disposed of at the best price available.
For raw gold, like raw copper or raw iron, has a price. Under the
English banking law, it is true, the Bank of England _must_ buy at the
rate of seventy-seven shillings nine pence per ounce all the gold of
standard (.916-2/3) fineness which may be offered it, but that
establishes merely a minimum--there is no limit the other way to which
the price of the metal may not be driven under sufficiently urgent
bidding.
The distribution of the raw gold is effected as follows: Each Monday
morning there is held an auction at which are present all the
representatives of home or foreign banks who may be in the market for
gold. These representatives, fully apprised of the amount of the metal
which has arrived during the preceding week and which is to be sold,
know exactly how much they can bid. The gold, therefore, is sold at the
best possible price, and finds its way to that point where the greatest
urgency of demand exists. It may be Paris or Berlin, or it may be the
Bank of England. According as the representatives present at the
auction may bid, the disposition of the gold is determined.
The _primary_ disposition. For the fact that Berlin, for instance,
obtains the bulk of the gold auctioned off on any given Monday by no
means proves that the gold is going to remain for any length of time in
Berlin. For some reason, in that particular case, the representatives
of the German banks had been instructed to bid a price for the gold
which would bring it to Berlin, but the conditions furnishing the
motive for such a move may remain operative only a short time and the
need for the metal pass away with them. Quarterly settlements in Berlin
or the flotation of a Russian loan in Paris, for instance, might be
enough to make the German and French banks' representatives go in and
bid high enough to get the new gold, but with the passing of the
quarter's end or the successful launching of the loan would pass the
necessity for the gold, and its _re_-distribution would begin.
In other words, both the primary movement of gold from the mines and
the secondary movement from the distributive centers are merely
temporary and show little as to the final lodgment of the precious
metal. What really counts is exchange conditions; it is along the lines
of the favorable exchange that the great currents of gold will
inevitably flow.
For example, if a draft for pounds sterling drawn on London can be
bought here at a low rate of exchange, anything in London that the
American consumer may want to possess himself of can be bought cheaper
than when exchange on London is high. The price of a hat in London is,
say, L1. With exchange at 4.83 it will cost a buyer in New York only
$4.83 to buy that hat; if exchange were at 4.88, it would cost him
$4.88. Similarly with raw copper or raw gold or any other commodity.
Given a low rate of exchange on any point and it is possible for the
outside markets to buy cheaply at that point.
And a very little difference in the price of exchange makes a very
great difference so far as the price of gold is concerned. As stated in
a previous chapter, a new gold sovereign at any United States assay
office can be converted into $4.8665, so that if it cost nothing to
bring a new sovereign over here, no one holding a draft for a pound (a
sovereign is a gold pound) would sell it for less than $4.8665, but
would simply order the sovereign sent over here and cash it in for
$4.8665 himself. Always assuming that it cost nothing to bring over the
actual gold, every time it became possible to buy a draft for less than
$4.8665, some buyer would snatch at the chance.
Such a case, with L1 as the amount of the draft and the assumption of
no charge for importing the gold, is, of course, mentioned merely for
purposes of illustration. From it should, however, become clear the
whole idea underlying gold imports. A new sovereign laid down in New
York is worth, at any time, $4.8665. If it is possible to get the
sovereign over here for less than that--by paying $4.83 for a L1 draft
on London, for instance, and three cents for charges, $4.86 in all--it
is possible to bring the sovereign in and make money doing it.
Whether the gold imported is in the form of sovereigns or whether it
consists of bars makes not the slightest difference so far as the
principle of the thing is concerned. A sovereign is at all times worth
just so and so much at any United States assay office, and an ounce of
gold of any given fineness is worth just so and so much, too,
regardless of where it comes from. So that in importing gold, whether
the metal be in the form of coin or bars, the great thing is the
cheapness with which it can be secured in some foreign market. If it
can be secured so cheaply in London, for example, that the price paid
for each pound (sovereign) of the draft, plus the charge of bringing in
each sovereign, is less than what the sovereign can be sold for when it
gets here, it will pay to buy English gold and bring it in.
Exactly the same principle applies where the question is of importing
gold bars instead of sovereigns, except that bars cannot be bought in
London at a fixed rate. That, however, in no way affects the underlying
principle that in importing gold the profit is made by selling the gold
here for more dollars than the combined dollar-cost of the draft on
London with which the gold is bought and the charges incurred in
importing the metal. To illustrate, if the draft cost $997,000 and the
charges amounted to $3,000, the gold (whether in the form of
sovereigns, eagles or bars) would have to be sold here for at least
$1,000,000, to have the importer come out even.
With exports, the theory of the thing is to sell a draft on, say,
London, for more dollars than the dollar-cost of enough gold, plus
charges, to meet the draft. As will be seen from the figures of an
actual shipment, given further on, the banker who ships gold gets the
money to buy the gold from the Treasury here, by selling a sterling
draft on London. Suppose, for example, a New York banker wants to
create a L200,000 balance in London. Figuring how many ounces of gold
(at the buying price in London) will give him the L200,000 credit, he
buys that much gold and sends it over. Suppose the combined cost of the
gold and the charge for shipping it amounts to $976,000. If the banker
here can sell a L200,000 draft against it at 4.88, he will just get
back the $976,000 he laid out originally and be even on the
transaction.
Before passing from the theory to the practice of gold exports and
imports, there is to be considered the fact that bar gold sells in
London at a constantly varying price, while in New York it sells at a
definitely fixed price. In New York an ounce of gold of any given
fineness can always be sold for the same amount of dollars and cents,
but in London the amount of shillings and pence into which it is
convertible varies constantly. So that a New York banker figuring on
bringing in bar gold from London has to take carefully into account
what the price per ounce of bar gold over there is. Sovereigns are
seldom imported because they are secured in London not by weight but by
face value,--even if the sovereigns have lost weight they cost just as
many pounds sterling to secure. Where the New York banker is exporting
gold, on the other hand, the price at which bar gold is selling in
London is just as important as where he is importing. For the price at
which the gold can be disposed of when it gets to London determines
into how many pounds sterling it can be converted.
These matters of the cost of gold in one market and the crediting of
the gold in some other market are not the easiest thing to grasp at
first thought, but will perhaps become quite clear by reference to the
accompanying calculation of actual gold export and gold import
transactions. All the way through it must be remembered that the
figures of such calculations can never be absolute--that insurance and
freight charges vary and that different operations are conducted along
different lines. The two operations described embody, however, the
principle of both the outward and inward movement of bar gold at New
York.
_Export of Bars to London_
In the transaction described below about a quarter of a million
dollars' worth of bar gold is shipped to London, the money to pay for
the gold being raised by the drawing and selling of a demand draft on
London. Assuming that the draft is drawn and the gold shipped at the
same time, the draft will be presented fully three days before the gold
is credited, that being the time necessary for assaying, weighing, etc.
In other words, there will be an "overdraft" for at least three days,
interest on which will have to be figured as a part of the cost of the
operation.
Following is the detailed statement:
13,195-1/2 ounces bar gold (.9166 fine) purchased
from U.S. Treasury or Sub-Treasury at
$18.9459 per ounce $250,000
Assay office charge (4 cents per $100) 100
Cartage and packing 20
Freight (5/32 per cent.) 390
Insurance (1/20 per cent.) 125
Interest on overdraft in London (from time draft
has to be paid until the gold is credited) 3
days at 4 per cent. 83
---------
Total expense of buying and shipping the
gold $250,718
13,195-1/2 ounces of gold credited in London at 77
shillings 10-1/2 pence L51,380
Draft on London for L51,380, sold by shipper
of the gold, at 487.96 $250,718
In the transaction described above, the "overdraft" caused by the
inevitable delay in assaying and weighing the gold on its arrival in
London lasted for three days, the American banker being charged
interest at the rate of four per cent. 487.96 being the rate at which
the banker exporting the gold was able to sell his demand draft at the
time, was, under those conditions, the "gold export point."
In this particular operation, which was undertaken purely for
advertising purposes, the shipper of the gold came out exactly even.
Suppose, however, that he had been able to sell his draft, against the
gold shipped, at 4.88 instead of 4.87-3/4. That would have meant
twenty-five points (one-quarter cent per pound) more, which, on
L51,380, would have amounted to $128.25.
This question of the profit on gold exports is both interesting and,
because it has a strong bearing at times on the question of whether or
not to ship gold, important. No rule can be laid down as to what profit
bankers expect to make on shipments. If, for instance, a banker owes
L200,000 abroad himself and finds it cheaper to send gold than to buy a
bill, the question of profit does not enter at all. Then, again, many
and many an export transaction is induced by ulterior motives--it may
be for the sake of advertising, or for stock market purposes, or
because some correspondent abroad needs the gold and is willing to pay
for it. Any one of these or many like reasons may explain the
phenomenon, occasionally seen, of gold exports at a time when
conditions plainly indicate that the exporter is shipping at a loss.
As a rule, however, when exchange is scarce and the demand so great
that bankers who do not themselves owe money abroad see a chance to
supply the demand for exchange by shipping gold and drawing drafts
against it, the profit amounts to anywhere from $400 to $1,000 on each
million dollars shipped--for less than the first amount named it is
hardly worth while to go into the transaction at all; on the other
hand, conditions have to be pretty much disordered to force exchange to
a point where the larger amount named can be earned.
_Import of Bars from London_
Turning now to the discussion of the conditions under which gold is
imported, it will appear from the following calculation that interest
plays a much more important part in the case of gold imports than in
the case of exports. With exports, as has been shown, the interest
charge is merely on a three days' overdraft, but in the case of imports
the banker who brings in the gold loses interest on it for the whole
time it is in transit and for a day or two on each end, besides. A New
York banker, carrying a large balance in London, for instance, orders
his London correspondent to buy and ship him a certain amount of bar
gold. This the London banker does, charging the cost of the metal, and
all shipping charges, to the account of the New York banker. On the
whole amount thus charged, therefore, the New York banker loses
interest while the gold is afloat. Even after the gold arrives in New
York, of course, the depleted balance abroad continues to draw less
interest than formerly, but to make up for that the gold begins to earn
interest as soon as it gets here.
The transaction given below is one which was made under the above
conditions--the importer in New York had a good balance in London and
ordered his London correspondent to buy and ship about $1,000,000 of
gold, charging the cost and all expenses to his (the New York banker's)
account. In this particular case the interest lost in London was at six
per cent. and lasted for ten days.
Cost in the London market of 52,782 ounces of
gold (.9166 fine) at 77 shillings, 11-3/4 pence
per ounce L205,795
Freight (5/32 per cent.) 320
Insurance 102
Boxing and carting 9
Commission for buying the gold 26
Interest on cost of gold and on charges, while
gold is in transit, 10 days at 6 per cent. 343
----------
L206,595
Proceeds, at U.S. Sub-Treasury in New York,
of the 52,782 ounces of gold at $18.9459 per
ounce $1,000,000
$1,000,000 invested in a cable on London at
$484.04 L206,595
In the above calculation it will be seen that the proceeds of the gold
imported were exactly enough to buy a cable on London sufficiently
large to cancel the original outlay for the gold and the expenses
incurred in shipping it over here. On the whole transaction the banker
importing the gold came out exactly even; a trifle over 4.84 was the
"gold import point" at the time.
In a general way it can be said that the profit made on gold import
operations is less than where gold is exported. Banking houses big
enough and strong enough to engage in business of this character are
more apt to be on the constructive side of the market than on the
other, and will frequently bring in gold at no profit to themselves, or
even at a loss, in order to further their plans. It does happen, of
course, that gold is sometimes shipped out for stock market effect, but
the effect of gold exports is growing less and less. Gold imports, on
the other hand, are always a stimulating factor and are good live stock
market ammunition as well as a constructive argument regarding the
price of investments in general.
_Exports of Gold Bars to Paris--the "Triangular Operation"_
Calculations have been given regarding the movement of bar gold between
London and New York--what is ordinarily known as the "direct" movement.
"Indirect" movements, however, have figured so prominently of recent
years in the exchange market that at least one example ought perhaps to
be given. Far and away the most important of such "indirect movements"
are those in which gold is shipped from New York to Paris for the sake
of creating a credit balance in London.
Before examining the actual figures of such an operation it may be well
to glance at the theory of the thing. A New York banker, say, for any
one of many different reasons, wants to create a credit balance in
London. Examining exchange conditions, he finds that sterling drafts
drawn on London are to be had relatively cheaper _in Paris_ than in New
York. In the natural course of exchange arbitrage the New York banker
would therefore buy a draft on Paris and send it to his French
correspondent with instruction to use it to buy a draft on London and
to remit such draft to London for credit of his (the American banker's)
account.
But exchange on Paris is not always plentiful in the New York market,
and very likely the New York banker will find that if he wants to send
anything to Paris he will have to send gold. Assume, then, that he
finds conditions favorable and decides to thus transfer a couple of
hundred thousand pounds to London by sending gold to Paris. The
operation might work out as follows:
Cost of 48,500 ounces of bar gold (.995 fine) at
U.S. Sub-Treasury, New York, at $20.5684 per ounce $997,567
Insurance (4-1/2 cents per $100) 450
Freight (5/32 per cent.) 1,555
Assay office charges (4 cents per $100) 400
Cartage and packing 60
Commission in Paris 250
Interest from time gold is shipped from New York until
draft on new credit in London can be safely drawn and
sold, 6 daysat 2 per cent. 333
-----------
$1,000,615
The gold arrives in Paris and is bought by the Bank of
France--
48,500 ounces at fcs. 106.3705 per ounce, equals
fcs. 5,158,969
That amount of francs then invested in a check on
London, and the check sent to London for credit of the
American banker, fcs. 5,158,969 at 25 francs 10
centimes per L L205,536
New York banker sells his draft on London for
L205,536 at 4.86832 $1,000,615
Conditions principally affecting the shipment of gold by the triangular
operation, it will be seen from the above calculation, are the rate of
exchange on London at New York, and the rate of exchange on London at
Paris. The higher the rate at which the New York banker can sell his
bills on London after the gold has been shipped, the more money he will
make. The lower the rate at which his Paris agent can secure the drafts
drawn on London, the greater the amount of pounds sterling which the
gold will buy. High sterling exchange in New York and low sterling
exchange in Paris are therefore the main features of the combination of
circumstances which result in these "triangular operations."
_Gold Shipments to Argentina_
Of the many other ways in which gold moves, one way seems to be
becoming so increasingly important that it is well worthy of attention.
Reference is made to the shipment of gold from New York to the
Argentine for account of English bankers who have debts to discharge
there.
Owing to Argentine loans placed in the English market and to heavy
exports of wheat, hides, and meat from Buenos Aires to London, there
exists almost a chronic condition of indebtedness on the part of the
London bankers to the bankers in the Argentine. Not offset by any
corresponding imports, these conditions are putting Buenos Aires each
year in a better and better condition to make heavy demands upon London
for gold, demands which have recently grown to such an extent as to
make serious inroads on the British banks' reserves. Unwilling to
comply with this demand for gold, the powers in charge of the London
market have on several occasions deliberately produced money conditions
in London resulting in a shifting of the Argentine demand for gold upon
New York. The means by which this has been accomplished has been the
raising of the Bank of England rate to a point sufficiently high to
make the dollar-exchange on New York fall. Able, then, to buy
dollar-drafts on New York very cheaply, the London bankers send to New
York large amounts of such drafts, with instructions that they be used
to buy gold for shipment to the Argentine.
The very general confusion of mind regarding these operations in gold
comes perhaps from the fact that they are constantly referred to as
being a result of _high exchange on London_, at New York. Which is
true, but a most misleading way of expressing the fact that _low
exchange_ on _New York_, at London, is the reason of the shipments.
High sterling exchange at New York and low dollar-exchange at London
are, of course, one and the same thing. But in this case, what counts
is that dollar-exchange can be cheaply bought in London.
No attempt is made in this little work to cover the whole field of
operations in gold, infinite in scope as they are and of every
conceivable variety. But from the examples given above it ought to be
possible to work out a fairly clear idea as to why gold exports and
imports take place and as to what the conditions are which bring them
about.
While not failing to realize the importance to the markets of the
movement back and forth of great amounts of gold, it may nevertheless
be said that from the standpoint of the foreign exchange business the
importance of transactions in gold is very generally overestimated.
Most dealers in foreign exchange steer clear of exporting or importing
gold whenever they can, the business being practically all done by
half-a-dozen firms and banks. As has been seen, the profit to be made
is miserably small as a rule, while the trouble and risk are very
considerable. Import operations, especially, tie up large amounts of
ready capital and often throw the regular working of a foreign
department out of gear for days and even weeks. There is considerable
newspaper advertising to be had by being always among the first to ship
or bring in gold, but there are a good many houses who do not want or
need that kind of advertising. Some of the best and strongest banking
houses in New York, indeed, make it a rule to have nothing to do with
operations in gold one way or the other. Should they need drafts on the
other side at a time when there are no drafts to be had, such houses
prefer to let some one else do the gold-shipping and are willing to let
the shipping house make its one-sixteenth of one per cent. or
one-thirty-second of one per cent. in the rate of exchange it charges
for the bills drawn against the gold.
Particular attention has been paid all through the foregoing chapter to
the gold movement in its relation to the New York markets, the movement
between foreign points being too big a subject to describe in a work of
this kind. In general, however, it can be said that of the three great
gold markets abroad, London is the only one which can in any sense be
called "free." In Paris, the ability of the Bank of France to pay its
notes in silver instead of gold makes it possible for the Bank of
France to control the gold movement absolutely, while in Germany the
paternalistic attitude of the government is so insistent that gold
exports are rarely undertaken by bankers except with the full sanction
of the governors of the Reichsbank.
It is a question, even, whether London makes good its boast of
maintaining Europe's only "free" gold market. The new gold coming from
the mines does, it is true, find its way to London, for the purpose of
being auctioned off to the highest bidder, but as the kind of bids
which can be made are governed so largely by arbitrary action on the
part of the Bank of England, it is a question whether the gold auction
can be said to be "free." Suppose, for instance, that the "Old Lady of
Threadneedle Street" decides that enough gold has been taken by foreign
bidders and that exports had better be checked. Instantly the bank rate
goes up, making it harder for the representatives of the foreign banks
to bid. Should the rise in the rate not be sufficient to affect the
outside exchange on London, the Bank will probably resort to the
further expedient of entering the auction for its own account and
outbidding all others. Not having any shipping charges to pay on this
gold it buys, the Bank is usually able to secure all the gold it
wants--or, rather, to keep anybody else from securing it. The auction
is open to all, it is true, but being at times conducted under such
circumstances, is hardly a market which can be called "free."
If there is any "free" gold market in the world, indeed, it is to be
found in the United States. All anybody who wants gold, in this
country, has to do, is to go around to the nearest sub-treasury and get
it. If the supply of bars is exhausted, the buyer may be disappointed,
but that has nothing to do with any restriction on the market. The
market for gold bars in the United States is at the Treasury and the
various sub-treasuries, and as long as the prospective buyer has the
legal tender to offer, he can buy the gold bars which may be on hand.
And at a fixed price, regardless of how urgent the demand may be, who
he is, or who else may be bidding. First come first served is the rule,
and a rule which is observed as long as the bars hold out. After that,
whoever still wants gold can take it in the form of coin.
How such conditions have worked out, so far as our gaining or losing
gold is concerned, can be seen from the following table, introduced
here for the purpose of giving a clear idea as to just where the United
States has stood in the international movement of gold during the
five-year period given below:
Exports of Excess of
Gold from U.S. Imports Imports
1913 $77,762,622 $69,194,025 [1]$8,568,597
1912 57,328,348 48,936,500 [1]8,391,848
1911 22,509,653 73,607,013 51,097,360
1910 118,563,215 43,339,905 [1]75,223,310
1909 91,531,818 44,003,989 [1]47,527,829
[1] Excess of exports
In conclusion, it may be said that the prediction that as international
financial relationships between banks are drawn closer, gold movements
will tend to decrease, seem hardly to be borne out by the figures of
the table given above. Banks here and banks abroad are working together
in a way unknown ten or even five years ago, but as yet there are no
signs of any lessening in the inward or outward movement of specie.
More liberal granting of international credits, increased international
loaning operations, far from putting an end to the physical movement of
gold in large quantities,--these are influences tending to make gold
move more freely than ever. The day of the treasure galleons is over,
but in their place we have swift-moving steamers by which gold can be
shifted from one point to another with safety and ease. Gold movements
seem as though they were to play an important part in the markets for a
good many years to come.